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Abbey/Land, LLC v. Glacier Construction Partners

Supreme Court of Montana

July 18, 2017

ABBEY/LAND, LLC, Montana Limited Liability Company, Plaintiff,
v.
GLACIER CONSTRUCTION PARTNERS, Defendant and JAMES RIVER INSURANCE COMPANY, Intervenor.

          FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER

          Amy Eddy, District Judge.

         On March 10, 2015, the Montana Supreme Court issued its opinion in Abbey/Land, LLC v. Interstate Mechanical, Inc., et al., 2015 MT 77, 378 Mont. 372, 345 P.3d 1032, wherein James River challenged the district court's entry of a $12 million confessed judgment entered into between Abbey/Land, LLC (A/L) and Glacier Construction Partners, LLC (GCP), and for which those parties would seek to hold James River Insurance Company (JRI) liable. After finding the district court should have allowed JRI to intervene to challenge the reasonableness of the confessed judgment, the Montana Supreme Court remanded the case as follows:

We reverse the District Court's judgment dated March 17, 2014, in favor of Abbey/Land LLC and against Glacier Construction Partners, LLC, in the amount of $12 million. We remand and direct the District Court to enter an order allowing James River Insurance Company to intervene in order to raise the issue of the reasonableness of the confessed judgment and whether it was the product of collusion. The District Court may set the reasonable parameters of the proceeding to determine these issues, and may determine whether there should be discovery and to what extent.

Abbey/Land, ¶17 (emphasis added).

         Accordingly, this matter came before the Court on July 17, 2017, for a one-day contested hearing to consider the issue of the reasonableness of the confessed judgment between A/L and GCP, and whether it was the product of collusion. Prior to the hearing the Court permitted the parties the additional discovery to allow JR1 the opportunity to "meaningfully contest" the confessed judgment, and allow the Court to "objectively consider both the merits of the underlying case and the value to a prudent uninsured defendant of confessing judgment in exchange for a covenant not to execute." J&C Moodie Properties, LLC v. Deck, et al, 2016 MT 301, ¶38, 385 Mont. 382, 384 P.3d 466 (quoting Tidyman's Management Services, Inc. v. National Union Fire Insurance Company of Pittsburgh, PA (Tidyman's II), 2016 MT 201, ¶38, 384 Mont. 335, 378 P.3d 1182). The Court considered all material and relevant evidence as to whether the confessed judgment was unreasonable, or the product of fraud or collusion. The parameters of the additional discovery for purposes of the reasonableness hearing were as follows:

(1) The parties were each permitted to serve one set of written discovery limited to 30 requests for production. Interrogatories and requests for admission were not permitted. Discovery was limited to documents and materials that existed at the time or prior to the date the confessed judgment was filed with the Court.
(2) Each party (A/L, GCP and JR1) was permitted to designate one Rule 30(b)(6) corporate representative, and two expert witnesses, who were to be fully disclosed pursuant to Rule 26, Mont.R.Civ.P.
(3) Each party was allowed to depose the Rule 30(b)(6) and expert witnesses of the other parties. Each such deposition was not to exceed 3 hours, total, and the time was equally split among all parties, 1.5 hours each. In addition, the party who offered the witness was permitted to perpetuate any additional testimony of the witness, not to exceed 30 minutes.
(4) Original depositions transcripts were filed with the Court and reviewed by the Court in their entirety, as well as deposition exhibits, prior to the hearing.
(5) Each party was able to offer no more than 30 exhibits in support of their respective position at the hearing.
(6) At the hearing the parties were afforded the opportunity to present rebuttal testimony from any of the previously disclosed Rule 30(b)(6) or expert witnesses, as well as argument.

         Prior to the hearing, and in an effort to guide discovery, the Court issued an additional order outlining the legal analysis and factors it would consider in determining whether the confessed judgment was unreasonable in amount, or the product of collusion.

         Prior to the hearing the Court reviewed the sworn deposition testimony of (1) Linda Finstad, JRFs Rule 30(b)(6) Designee; (2) John Crist, JRI's Expert Witness; (3) John Guin, JRI's Expert Witness; (4) Greg Murphy, GCP's Expert Witness; (5) William Matteson, A/L's Rule 30(b)(6) Designee and Expert Witness; (6) Ken Lind, GCP's Expert Witness; (7) Paul Pederson, A/L's Expert Witness; and (8) Jeff DuChateau, GCP's Rule 30(b)(6) Designee. While testimony was elicited from witnesses regarding incidences which occurred after the confessed judgment was entered, the Court has disregarded this testimony consistent with its earlier orders. The Court also reviewed over 100 depositions referenced in the various depositions.

         At the hearing JRI called (1) John Guin, and (2) John Crist to offer additional testimony, and the Court requested further testimony from Paul Pederson. The Court also admitted into evidence Hearing Exhibits 1-76. The Court rejected all objections on the part of A/L and GCP on the grounds that the attorney-client privilege had been waived; any hearsay objection was unfounded under Rule 801(d)(2), Mont.R.Evid.; the exhibits, having been produced by the parties in discovery, had sufficient indicia of reliability; and were permitted to be considered under Rule 703, Mont.R.Evid. The Court also rejected any argument the expert witnesses were not competent to testify regarding their respective opinions, although each witnesses' testimony had different weight depending on their expertise. Having considered the deposition and hearing testimony, as well as the exhibits admitted at the hearing, the Court makes the following:

         FINDINGS OF FACT

         (1) Donald G. Abbey (Abbey) is a wealthy real-estate developer from Southern California. His primary residence is in California. He owns, manages, and controls both A/L and GCP. A/L and GCP are among twenty-two limited liability companies owned by Mr. Abbey, fifteen of which were registered to transact business in Montana.

         (2) A/L was formed in 2000, to purchase Shelter Island, a small island in Flathead Lake, and related shoreline properties. Shelter Island itself was purchased for $2 million. Another $ 15 million in development costs, but excluding construction costs of the residence, was invested into Shelter Island and the shoreline properties necessary to support it. Abbey is the sole owner, manager, and member of A/L. He is the ultimate decision maker for A/L, which does not have any other employees.

         (3) In 2001, A/L began to build a large residence on Shelter Island, but fell into dispute with the original general contractor. Accordingly, Abbey formed GCP to act as a new general contractor for the project. Abbey was also the sole owner, manager, and member of GCP. GCP's only construction project was the residence on Shelter Island.

         (4) Matteson, A/L's Rule 30(b)(6) designee testified the property and residence was held by Abbey for investment purposes, and he didn't know if he ever intended to live there. This testimony binds A/L-in contrast to Pederson's testimony that Abbey intended to live at the property 50% of the time and have it be his primary residence.

         (5) The same individuals performed work on behalf of both A/L and GCP. For example, William Matteson was both the Vice-President of GCP, and also responsible for the financial transactions of A/L. The Abbey Company, a separate entity owned by Abbey, paid Matteson for the work he performed on behalf of A/L and GCP.

         (6) As acknowledged by Linda Finstad, JRI's Rule 30(b)(6) designee, Abbey's various corporate structures, designed to create multiple layers of insurance and pass through liability to subcontractors, are not uncommon in the industry.

         (7) On May 1, 2006, Abbey entered into a General Contract on behalf of both A/L and GCP for the construction of his residence on Shelter Island. Ex. 1-7. The contract included an arbitration provision which limited the prevailing party's damages to actual damages. Consequential damages were specifically excluded from recovery, as well as punitive or other damages not measured by the prevailing party's actual damages. Ex. 1-10.

         (8) Under the General Contract, GCP was reimbursed for the cost of all the work it performed, but did not earn any profit. Typically, a general contractor receives a fee in the form of a percentage mark-up on the costs of the work, or a pre-established lump sum fee, in order to compensate the contractor for its general overhead and for its profit. The General Contract also provided A/L would reimburse GCP for the cost of correcting defective work. Thus, under the General Contract, GCP served more as a construction agent for A/L, instead of an independent, at-risk general contractor. GCP was not designed to generate a profit off of subcontractors, or anyone else, and relied solely on Abbey as a source of funds.

         (9) Abbey had previously hired Interstate Mechanical, Inc. ("IMI") to provide analysis and recommendations regarding the mechanical, electrical, and plumbing systems in Abbey's litigation against the former architect and former general contractor on the Shelter Island project. After GCP took over general contractor responsibilities in 2006, IMI was hired as a subcontractor to provide HVAC and plumbing work on the project. GCP entered into a $1.4 million contract with IMI, Inc. for the design and installation of the plumbing and heating-cooling system for the house. Subsequent change orders increased the value of that contract by approximately $ 1 million.

         (10) When a dispute arose between A/L and IMI in 2009, IMI invoked the arbitration provision of their agreement. IMI claimed $806, 917.95 in damages arising from its termination from the project. GCP counterclaimed against IMI for $1, 608, 644.26 in damages arising from its faulty work. Ex. 2-11.

         (11) A preliminary arbitration hearing was scheduled for September 24, 2009.

         (12) A/L and GCP filed this action on September 23, 2009, the day before that scheduled arbitration hearing. Initially, A/L and GCP were both plaintiffs and asserted claims against IMI and others for compensatory and punitive damages generally arising from a pipe that broke in 2008, which flooded the basement and caused over-saturation of the septic system drain filed, which led to an E-coli contamination of the well, as well as freezing of the sprinkler system inside the house.

         (13) A/L and GCP requested that the arbitration be stayed because they wanted to recover consequential damages but the arbitration provision precluded such an award. However, the United States District Court for the District of Montana (Judge Molloy) ultimately ordered GCP to arbitrate its entire dispute with IMI. In doing so, he found that "[i]f a party could remove a matter from arbitration simply by changing the types of damages it claimed, the arbitration clause would be meaningless."

         (14) GCP first tendered a defense of A/L's claims to JRI on October 10, 2010, to which JRI refused a defense on October 14, 2010. GCP represented to JRI that damages were likely in the $1-2 million range. At this point in time A/L and GCP were aligned as plaintiffs in this matter.

         (15) On November 1, 2010, the parties attended a mediation in this matter where A/L and GCP made a joint offer to settle all claims for $3.5 million. Ex. 23-3. The matter did not settle and arbitration continued to move forward separately.

         (16) On January 17, 2011, the arbitrator ultimately found IMI was entitled to $83, 528 from GCP, and GCP was entitled to $497, 549.11 from IMI, resulting in GCP receiving a positive arbitration award of $414, 021.11. In making his determination as to damages, the arbitrator found as follows:

The Project was extremely complex. This was fast track construction with much of the design work (and decisions) being made as the Project was being built. There were numerous changes to the work and the Project was wrought with environmental concerns and requirements. Mr. Abbey had his own agenda as to what he wanted and expected without regard to what it took to achieve the end result and (in some cases) what it cost. Although Mr. Steinbeck was a competent contractor, and I am not critical of his performance, he was not an architect or an engineer. Since the scope of this Project rivaled a fast track, complex, commercial Project, it warranted having an architect to administer the Project, update schedules, respond to questions regarding ongoing coordination and design issues, and to deal with ongoing changes. Although the termination [of Interstate] was technically warranted, not all of the damages and occurrence alleged or suffered by Glacier can be blamed on Interstate. Some of the work performed in completion of Interstate's work constitutes betterment to the systems originally contracted for. Some of the costs Glacier now suffers are also a result of not having an architect on board to administer the Project and not having adequate project controls in place. This makes assessment of damages very difficult in that many of the categories of damages have shared responsibility . . . Ex. 2-10.

         (17) The arbitrator's award to GCP is relevant as many of the categories of damages claimed by GCP that were rejected by the arbitrator are being claimed again in their entirety as part of the confessed judgment. Some of these claims were rejected because they represented "betterment" of the project. However, some of the claims were rejected because the arbitrator found they were caused by the negligence of GCP. Matteson testified A/L had no reason to believe GCP was negligent in the construction of the project prior to this finding by the arbitrator.

         (18) The damage claims litigated in the arbitration belonged to A/L. GCP had not suffered any damages due to any alleged construction defects because A/L had paid GCP for all its work. Any costs incurred to fix the alleged construction defects would have been incurred by the owner, A/L, which had paid GCP in full.

         (19) Paul Pederson, A/L's expert, testified that he generally incorporated the entire $1.6 million claim for actual damages alleged in the arbitration into the damages alleged by A/L in this case. Other than the addition of interest by Mr. Pederson and the alleged increase in electricity costs, the actual damages claimed by A/L in this case are substantially similar to the damages alleged in the arbitration. The categories of actual damages are identical, although the amounts claimed might vary slightly due to the use of estimates in the arbitration and hard numbers in this matter.

         (20) The primary difference between the damages alleged by A/L in this case compared to the arbitration are consequential and punitive damages. Consequential damages constitute the overwhelming majority of the damages alleged by A/L in this case. However, they were prohibited from being recovered by GCP in the arbitration as the contract between Glacier and IMI prohibited their recovery. Recovery of consequential damages was also prohibited by the General Contract between A/L and GCP. Ex. 1-10.

         (21) The Arbitration Award was issued on January 17, 2011. Ex. 2-13. Just a few days later, Abbey shut down GCP and transferred all its assets to A/L and one of Abbey's other companies:

We are in the process of discontinuing contracting operations in Montana and shutting down Glacier.
As a result, client will be transferring title of all Glacier assets to Abbey Land and/or Abbey Transportation. All vessels, heavy equipment will be transferred to the Transportation company. Any fixed assets to Abbey Land.

         (22) The scheduled "shut-down" date for GCP was February 15, 2011. GCP did not receive any compensation in exchange for its assets.

         (23) On March 18, 2011, after Abbey shut-down GCP, A/L made a demand against GCP to be paid the entire amount of the $414, 021.11 arbitration award, as the amount represented damages actually incurred by A/L. Ex. 22. A/L also represented the total amount of damages had yet to be determined, and that the loss of use damages would be substantial when claimed against IMI and GCP.

         (24) A/L claimed GCP was liable to A/L for the arbitration award and demanded that GCP tender to A/L all proceeds recovered from any insurance company. Ex. 22. The demand letter was sent by Robert Jenkins, an employee of The Abbey Company, but was drafted by legal counsel for A/L and GCP.

         (25) On March 23, 2011, GCP tendered A/L's claim for payment of the $414, 021.11 arbitration award to Travelers.

         (26) On April 8, 2011, GCP voluntarily dismissed all of its claims against all of the defendants.

         (27) On September 23, 2011, A/L filed its Second Amended Complaint naming GCP as defendant. (Doc. 50).

         (28) In the Second Amended Complaint A/L alleged the defendants collectively had been negligent. The Second Amended Complaint did not include any specific allegations against GCP. For example, there were no allegations that would support claims against GCP for negligent construction administration, negligent hiring of subcontractors, or negligent supervision of such subcontractors. While Matteson testified A/L was not aware of GCP's negligence until after the arbitrator's findings, these were the types of claims contemplated by the arbitrator. Nonetheless, they were not brought against GCP by A/L. Instead, A/L's claims of negligence against GCP were simply the pass through claims against the subcontractors.

         (29) In its Answer, GCP admitted all of the general factual allegations made by A/L in the Second Amended Complaint. In regard to the claim of negligence, GCP simply stated, "All of Glacier's general contractor work at issue in this case was brokered to subcontractors . . . Admit the other Defendants herein were negligent." GCP also admitted all of A/L's allegations of damages. The only affirmative defense GCP raised was that all of A/L's damages were caused by the conduct of others. GCP did not raise other common affirmative defenses-such as A/L's duty to mitigate its damages, or enforceability of the arbitration provision, which would have limited the scope of GCP's liability to GCP.

         (30) Reoriented as a defendant in this matter, GCP again tendered A/L's claims to JRI. Within 45 minutes JRI refused to provide defense or indemnity, asserting that the claims-made policy it issued to GCP did not provide coverage for the same reasons it had denied a defense in 2010.

         (31) The purpose of flipping GCP to a defendant was to access additional layers of insurance, which, all things being even, is a prudent maneuver.

         (32) In early 2011, prior to A/L filing the Second Amended Complaint against GCP, counsel for A/L and GCP noted that, if A/L were to file a formal claim against GCP, the arbitration provision in the General Contract would be important because the arbitration provision would have limited A/L's claim for damages against GCP.

         (33) Accordingly, Abbey, on behalf of both A/L and GCP, subsequently entered into a First Amendment to General Contract, which among other things amended the General Contract to delete the arbitration provision contained in §3.4. Ex. 1-13. By deleting that provision, Abbey also removed the prohibition against any award of consequential or punitive damages against GCP and allowed him to have A/L sue GCP.

         (34) The First Amendment states it was being "entered into as of June 9, 2009." However, a string of emails between Abbey and various attorneys in 2010-2012 demonstrate that June 9, 2009, was actually a retroactive date in an attempt to get out from underneath the limitations of the arbitration clause which deprived A/L of seeking consequential damages. Exs. 16, 27.

         (35) According to Matteson, A/L's Rule 30(b)(6) designee, the First Amendment to General Contract was allegedly entered in April of 2011, by Robert Jenkins, in-house counsel for the Abbey Company. However, the modification to the General Contract did not appear in this litigation until 2013 when Mr. Best attached it to a declaration (Dkt. 299) that he filed after the confession of judgment had been entered.

         (36) Moreover, the record does not reveal when Abbey actually executed the purported amendment. The only knowledge A/L's Rule 30(b)(6) designee had regarding the amendment came from A/L's current attorney. James Cummings, GCP's attorney for a brief period in 2012, was not aware of any modification to the General Contract. Ex.3-5. He had planned to file a motion to compel arbitration but was then terminated as counsel for GCP.

         (37) Trent Baker, who replaced Cummings at the request of Cushman, was also apparently unaware of any modification. In September of 2012, when the insurance adjuster asked Baker why the case was not in arbitration, he responded that the arbitration clause would only apply to claims for breach of contract-he did not state that the arbitration clause no longer existed. Ex.3-3.

         (38) Even if the General Contract was actually modified in April of 2011, A/L had already made demands against GCP at that time. It was not in GCP's interest to amend the General Contract to remove significant contractual protections.

         (39) On September 27, 2011, after A/L had filed the Second Amended Complaint, Best filed a Notice of Appearance (Doc. 52) on behalf of GCP, and also a Motion to Admit Attorney Jon E. Cushman Pro Hac Vice (Doc. 53). On October 2, 2011, the Court issued its Order (Doc. 55) granting the Motion to Admit Attorney Jon E. Cushman Pro Hac Vice on behalf of GCP. On October 25, 2011, Cushman was also admitted pro hac vice in the Lake County matter under the supervision of John Mercer, and also on behalf of GCP. At the same time, Best was representing A/L in the Lake County matter. (Ex. 17-1).

         (40) GCP then answered the Second Amended Complaint by admitting nearly every allegation and cross-claiming against the other defendants. Even though GCP had switched from a plaintiff to a defendant, its legal position had not changed.

         (41) Cushman controlled GCP's defense. For example, at one point and as discussed above, Cumming was appointed as counsel by one of GCP's insurers and began taking steps to defend GCP from the claims asserted by A/L. These efforts included retaining a construction expert and considering a motion to compel arbitration. The construction expert, Mike Herbst, examined A/L's claim for damages and believed that "a lot of the allegations were items that were doomed from the start." Ex. 3-4. Herbst opined the root of A/L's alleged damages was that the drain field was not designed to handle the 25 gallon per minute shower heads that Abbey had installed in all the bathrooms in the house. GCP likely would not have been liable for an improperly designed drain field.

         (42) On May 7, 2012, Cushman instructed Cumming not disclose to anyone that he had retained Herbst:

The expert you brought with you to the island was hired by you for Glacier, correct? He has not made a written report, correct? Most importantly, he has no contact with anyone but you and in particular, has not had contact with the carrier or anyone on behalf of carrier, correct?
I want to maintain strictest silence on that expert until I decide we want to identify him. Until then I do not want the carrier or anyone else to get any information about him, or about the project from him. Ex. 29.

         (43) On May 12, 2012, Cushman then directed the insurer to terminate Mr. Cummings as counsel for GCP. Ex.3-3. An entry in the insurer's claims journal states "Received an email from Jon Cushman regarding wanting to replace James Cummings in this case... Because of the tenor of Mr. Cushman's letter, I am not sure who he represents." A subsequent journal entry states "I have been advised that I need to terminate James Cummings ...." This was after Cummings had signaled his intention on March 29, 2012, to enforce the arbitration provision. Ex. 3-5.

         (44) Following Cumming's termination, there is no evidence any effort was made by anyone to mount a defense on behalf of GCP. For example, GCP did not issue any discovery to A/L ...


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